As well as Victor Frankenstein sought to create a body from the union of different parts of dissected corpses, the president Javier Milei, appeals to dispersed policy tools that have failed repeatedly in the past. He puts them together and hopes with hilarious fascination to free the country from the chronic instability and stagnation in which it has been mired for more than a decade, implementing a model that He shares the traits of coldness and cruelty of that monster from the North Pole.
The first relevant and most terrifying decision so far was toincrease the official exchange rate by an extravagant proportion. Between November 28 and 30, the analysts consulted by the BCRA, through the Market Expectations Survey, estimated, on average, that the dollar would be trading at 593 pesos last December and, however, it reached 810 pesos in that month. None of the 35 participants in the survey thought that the then president-elect would dare to raise it so abruptly.
Government did not carry out any type of redistributive compensation to moderate the regressive impact of the devaluation, but, simultaneously and in an unprecedented manner, decided to raise the rate of the Country Tax on all imports from 7.5% to 17.5%. There are no historical records of devaluations combined with massive increases in taxes on foreign purchases, basically because it means enhancing the worst of the inflationary effect. First of all, The government’s obsession with achieving a fiscal surplus seems to have prevailed at any cost to display it as a trophy to financial speculators as collateral for debt payment.
Overnight, the measures caused an increase in the effective exchange rate for imports of 139%. The main result was a brutal and very rapid increase in the cost of tradable goods and services (it is what is internationally marketable) and a deep drop in activity. The INDEC measurement in December recorded that imported products increased by 81%.
The tremendous exchange and tax shock is the most important factor that explains the great inflationary acceleration of the last three months and the extraordinary drop in consumption (in supermarkets, for example, the quantities sold fell 13.8% in January, according to INDEC ). To the Like Mauricio Macri’s government, Javier Milei’s government almost doubled the inherited rate of rise in the general price level. In the last quarter of Alberto Fernandez’s presidency, the CPI variation had reached 37.8% and in the first of Milei it was 71.4%.
It is not a sensible path to produce an increase in inflation of that magnitude if the objective is to reduce it. The increase in the nominal value of the economy is now much more complicated to reverse. It implies that prices that do not directly adjust for the exchange rate, such as service provision contracts, take much more of the registered CPI as a reference than the expected one, aggravating inertia. From now on, Milei is betting that depression will discipline workers/consumers. In other words, it seems to be confident that the effect of monetary and fiscal contraction will reduce demand enough to create a sufficient excess supply to neutralize the inflationary dynamic, beyond the enormous suffering it generates.
There is not even a specific policy on the part of this government aimed at promoting investments to expand domestic supply. In such an unstable and anemic economy of growth, with measures that aim only to affect consumption to confront inflation, it seems very unlikely that this scenario will seduce investors or encourage decisions, at least, to expand supply.
The opening of imports, a rude and contradictory comedy step
To make matters worse, in the maelstrom of price increases, the President, unlike the tax issue (he had said that, before raising taxes, he would cut off his arm), fulfilled his liberal promise to eliminate price controls, even the most sensitive ones such as the goods in the basic food basket. And the effect was predictable, with a revalued dollar, overtaxed goods and a severe reduction in real household income.the family budget was concentrated on the most basic.
Meanwhile, Milei’s maxim, which could well symbolize Frankenstein’s head regarding the fact that “inflation is always and everywhere a monetary phenomenon”, lacks policy responses to changes in relative prices. Especially when those who lose are salaries and there are companies that have more capacity to form prices in the mass consumption sectors. In those areas of inelastic demand, Falling sales volumes are generally more than offset by price increasesfundamentally when it comes to supply provided by a few companies, such as in the case of fuel, basic foods or medicines.
This situation of abusive price increases in the most sensitive consumptions for families and with a high impact on the CPI unleashed a rude and contradictory step of comedy. Milei and Caputo tried to explain that the price chaos was related to the fact that businessmen had oversized the instability. Would it be the exception to the rule that inflation is always and everywhere a consequence of a monetary phenomenon or was reality what failed? The President himself contributed to this disaster not only due to the mega devaluation and tax increases, but also due to his inaugural speech on December 10, when he maintained that they had left him with “an inflation of 15,000%” without basing that calculation on no rational argument.
So, the “liberals” returned to the sources, although only in a partial and discriminatory way, lowering taxes on imports of basic basket goods and improving payment conditions for foreign suppliers. Perhaps their fear of losing tax revenue outweighed their liberal ideology and, therefore, they opted for a gas opening and Frankenstein took even more shape.
Trade facilitation applies precisely in an area where the industry has comprehensive productive capacity and marginalizes from these incentives other industries that require inputs or capital goods that are not manufactured locally. A reduction in food production not only generates less employment and wealth for the country, but also a greater need for dollars to cancel avoidable import commitments. Currently, due to its self-sufficiency, the sector does not demand an amount of foreign currency that could alter the exchange balance. However, the measure does have a significant potential for substituting domestic production with imports, which especially harms SMEs and will contribute to the fragility of the country’s external front. Furthermore, there is no certainty that the lowering of costs by supplying abroad implies a transfer of proportional or relevant benefits to the consumer and not greater marketing profits, especially because there is a high concentration in food distribution. Or will Milei intervene in the market?
Pretend that, after the exchange rate jump, companies mitigate price increases without having designed productive planning and coordinated medium/long-term public policy tools. it only guarantees recession and more crisis. And lowering the cost of imports in an industry with a high capacity for self-sufficiency will produce a reverse import substitution process, limiting the trade surplus achieved exclusively through the depression of consumption and the destruction of jobs.
Finally, Frankenstein takes up the pill of exchange rate delay that generates so much appreciation in the select financial world to try to lower inflation. As has happened so many times, without structural changes that accompany and allow the expansion of the productive infrastructure and the organization of the markets, the monster will end up exploding due to the internal and external pressure it causes and that many already expect. This scenario today is macabre because it is complemented by spurious twin surpluses (fiscal and commercial), anchored in the destruction of the purchasing power of workers and the postponement of public sector payments. The inconsistency of the model will make the monster bigger. It will logically manifest itself in another devaluation jump that will once again oxygenate competitiveness due to loss of wages, generate great benefits for exporters, the need for a greater fiscal sacrifice, but will also provide more room for the public administration to pay the debt that financial speculators celebrate. Like every horror movie, the ending is dark.
Source: Ambito
